Credit risk is the risk that an unexpected change in a counterparty’s creditworthiness, in the value of the collateral provided, or in the margins used in case of default might generate an unexpected variation in the value of the bank’s exposure. Credit risk also consists of concentration risk, country risk and residual risks, both from securitisations and uncertainty regarding credit recovery rates.

MARKET RISK

Market risk arises as a consequence of our Group’s trading and its open positions in the foreign exchange, interest rate and capital markets and arises from the fluctuation in the value of quoted financial instruments whose value is linked to market variables. Our Group is also exposed to market risk in the banking portfolio, which arises from differences in fixed rate periods.

FOREIGN EXCHANGE RISK

Foreign exchange risk is defined as the possibility that foreign exchange rate fluctuations produce significant changes, both positive and negative, in our Group’s balance sheet totals. The key sources of exchange rate risk come from foreign currency loans and deposits held by corporate and retail customers; purchases of securities, equity investments and other financial instruments in foreign currencies; conversion into domestic currency of assets, liabilities and income of branches and subsidiaries outside Italy; trading of foreign currencies and banknotes; collection and/or payment of interest, commissions, dividends and administrative costs in foreign currencies.

LIQUIDITY RISK

Liquidity risk is defined as the risk that our Group will not able to meet its payment obligations when they fall due.

OPERATIONAL RISK

Operational risk is defined as the risk of suffering losses due to inadequacies or failures of internal processes or systems, people or as a result of external events. Operational risk includes legal risk but neither strategic nor reputation risk.

RISKS SPECIFIC TO OUR INSURANCE BUSINESS

Life businessThe typical risks of life insurance portfolios may be divided into three main categories: premium risks, actuarial and demographic risks and reserve risks.

Non-life business The typical risks of the non-life insurance portfolio are essentially premium and reserve risks.

STRATEGIC RISK

Strategic risk is defined as the risk associated with a potential decrease in profits or capital due to changes in the operating environment of our Group, misguided Group decisions, inadequate implementation of decisions, or an inability to sufficiently react to competitive forces.

REPUTATIONAL RISK

Reputational risk is defined as the current and prospective risk of a decrease in profits or capital due to a negative perception of the Bank’s image by customers, counterparties, shareholders, investors and supervisory authorities.